Reasons to build an internal model for ERM
Module 30 Section “Internal Capital Models”
Module 21 Section “Model Development”
Pros and cons of using standard formula vs internal model for SII
Module 30 Section “Internal vs Generic Models”
Key to focus is on the small size and niche risk of the company
Make sure to discuss both sides
Selection of models between 3 options
Some key points:
Model 1:
Runtime okay
Less human error
Some approximation
Appropriate matching assets might be hard to find
Model 2:
Least approximation
Hard to calibrate (due to high number of real world scenarios needed)
Long run time
Too complex hard to test
Model 3:
Additional information on the software to request
Propose practical cost effective ERM activities
Make sure we’re not just proposing mitigation activities
Key is on the early steps of the ERM process and more focus on the governance
Identify
Risk register
Risk appetite and tolerance statement
RMC and have meetings and risk reports
Appoint risk manager
Module 13 Section “Risk Identification and Assessment Process”
Module 9 Section “Risk Management Policy”
Module 10 Section “Risk Reporting”
How bank would evaluate the credit risk of the company
Should be mostly from Module 23 and 28
Credit Granting, Underwriting, Due DiligenceList out the assumptions, how to access probability of default and loss given default
Key is to have a wide range of ideas
PD
Assess this for key possible reasons for default
1 reason would be due to non payment
Another reason could be macro driven (e.g. property value < loan principal)
LGD
Improvement on corporate governance
Module 4, 11, 12 (maybe 8 and 9)
Some key themes
BoD structure
Incentivise the BoD
Expand shareholders
Board committees
Audit structure
Risk identification tools
Module 3
10 potential op risk
Whether holding additiona capital is a suitable risk mitigation technique for op-risk
Alternative mitigation techniques for the op-risk in v
Modeling for flood risk
Information needed for modeling flood risk
Module 20, 15
Amount of data, for freq and sev
Repair cost and expert judgement (for trends and changes)
Overall corporate risk exposure and importance of each risk after allowing for the impact of likely mitigation strategies
Module 13
Use Categorization technique to rank the risk
State what are the objectives used to judge the risk
Define what high risk is
Categories of risk:
list out the rating for freq and sev and any mitigations
Financial
Customer demand
Other
Other considerations
Correlations
Company’s mitigation process
Conclusions
Ways to reduce financial market risk exposure without risk transfer
Module 26, 27, 28
Avoidance
Diversification
ALM
Internal control
ALM risk
Cashflow matching
2015 Exam and Examiners’ Report
Assess the fitted t distribution
Module 15, 16, 19
Discuss data set size, applicability for future (regime shift)
Shapes of the empirical
Fitted vs empirical
Data excludes dividend income
Propose further analysis or adjustments
Remove dependencies and overlap
Longer period of data
Assess the stress scenario picked
See how it stacks with a normal distribution with the observed s.d.
diversification (not bad at the same time)
Comprae the series
Discuss features on spread and how it should behave
Suggest possible extensions to the analysis
Other consideration that impact the spread
Split by industry, include other countries
Model future risk free bond yields using PCA
Module 22 and 16 (Maybe 19)
Straight from the notes
Module 22 talks about how to fit the data
Modeul 16 talks about how to simulate with PCA
How many PC are likely to be used
Currency movement impact on solvency ratio and how to hedge
Explain why it would impact the ratio
Propose how to hedge with forward
Disadvantage of the above viii
Propose alternative objectives for the currency risk hedging
Intead of a fix 200%
Introduce probabilitys
Why hold captial for currency risk
How ERM will help with sovereign deft crisis before, during and after the crisis
List out ERM benefits first
On risk identification, quantification, limits
Crisis plan
Before crisis
During
Reporting, operational effectiveness
Profit off the crisis, minimize impact
After
Buying CBI insurance, risk that could arise during sovereign debt crisis (and how hard it is to quantify)
Evaluate the risk culture
Identify and analyse emerging risk
horizon scanning
holistic view
Implications on diminishing natural resources
Actions to take on the above
How to hedge the guarantee using HPI floors
Describe the weakness of the hedge
Basis risk (actual outperforming or underperformaing the HPI)
High cost
Liquidity, credit risks
Using RPI instead of HPI
Assess the basis risk
Should remove trend before accessing correlation
Time period chosen
Difference in the cumulative increase
Additional analysis